Foreclosures seem to be slowing, but the country still isn’t in the clear. If your home is in danger of facing foreclosure becuase of a HELOC in default, it’s important to have some idea of what the bank will do. Here are the five primary ways HELOC foreclosure situations play out:

1. The homeowner is given permission to offer a short-sale.
2. The homeowner is given permission to offer a short-sale because the primary mortgage holder offers a monetary incentive to the HELOC lender.
3. The primary lender forces a foreclosure.
4. The HELOC lender forces a foreclosure.
5. The HELOC lender purchases the primary loan.

Each of these five possibilities offers unique benefits and drawbacks to the homeowner. Take a look at the article HELOC Foreclosure to learn more about how to make the most of your situation in each possibility.

photo credit: stevendepolo

Courthouse News Service reports:

“Yakas filed a class action, alleging breach of contract and unjust enrichment. She said Chase breached the HELOC in three ways: by failing to obtain an appraisal by a licensed appraiser, by using the unreliable AVM to assess her property value and by charging her a $20 annual fee after it suspended her credit line.”

It’s about time that someone stood up for HELOC borrowers’ rights. Lenders can certainly limit or even freeze HELOC lines if there is not sufficient equity remaining in a property. However, it is unfair to freeze HELOCs in batches or based on these so-called “automated valuations” that do not require any actual appraisals or personal considerations.

photo credit: The-Lane-Team

See Also:

HELOC Freeze Help

WalletPop reports:

“That’s a possible step to take before you lose your job, but not after you’ve lost it. Why? You most likely won’t qualify if you don’t have a job, especially during these times when skittish lenders often aren’t lending to people who are still employed. And even if you do qualify, expect to be charged a whopping interest rate. Many financial experts say a HELOC is the last of the last resorts.”

Unfortunately, it’s often difficult to predict layoffs. However, many applicants are able to take out a home equity line of credit with few closing costs and let the line sit unused until trouble arises.

See Also:

Is a HELOC Right for Me?

Good news: you do not need to get approval from your HELOC lender in order to apply or have your mortgage modified.

The Daily Camera explains some of the qualifications necessary:

“Your monthly payment must be above 31 percent of your family gross monthly income. Monthly payment includes your first mortgage payment, homeowners insurance, property tax, and HOA/condo fees. Unlike the refinance plan, the modification plan does not require the acceptance of the HELOC or second mortgage lender…

You need to be suffering a change in circumstances that leaves you unable to make your payment, such as being laid off or having a toxic loan. You must sign an affidavit of financial hardship and verify your income.”

The mortgage modification program won’t change the terms of your HELOC. But, you do not need to seek permission from your second mortgage lender.

See Also:

How the Foreclosure Prevention Plan Helps HELOC Borrowers

BankingMyWay reports:

“One way is to get a home equity line of credit, or HELOC. It allows you to borrow against the equity in your home — the difference between the home’s value and what you owe on the mortgage.  Just remember, it’s essential to get the HELOC approved before you lose a job, as you probably won’t qualify afterward.

With a HELOC, you draw money only as you need it – and as much as you would with a credit card, but with a much lower interest rate. For most borrowers, interest paid on home equity loans is deductible on the federal income tax return.”

If you decide to take out a HELOC as safety net, keep in mine that you’ll be responsible for the balance even if the house goes into foreclosure. Unlike credit card debt, a HELOC is secured by your property. Don’t make the payments, and you may find yourself without a roof over your head.

See Also:

Is a HELOC Right for Me?

Negotiating HELOC Terms

Examiner.com reports:

“…What is the purpose of the HELOC? If it’s a rainy day fund like it is for my client, then the impact is low if a bank cancels a HELOC. If someone is using their HELOC to finish a major home remodel, then the impact of a freeze would be large. If you’re in the situation where you need the HELOC now, please see a competent financial professional who can help you figure out the costs and risks of taking on more debt right now.”

In some cases, borrowers are withdrawing funds from their home equity lines of credit to avoid the consequences of a potential freeze in the future. However, this option can be unnecessary and costly for many homeowners. Taking the time to analyze your situation can help you make the best decision.

photo credit: diegodacal

See:

More Articles on the Home Equity Line of Credit Freeze

Reuters explains:

“Delinquent home equity loans — which represent E*Trade’s greatest exposure to loan losses — totaled $753 million in February, up 1 percent from the end of last year. However, the early-stage delinquencies were down 16 percent over the last two months.

“(E)arly stage delinquencies are showing signs of stabilization, particularly in home equity where they’ve declined year-to-date,” Fox-Pitt Kelton analyst David Trone said in a research note.”

Although the overall delinquencies HELOC loans and other equity lending products has increased, it looks like a growing number of defaulting borrowers have actually been able to catch up with their mortgages.

Is this the sign of a home equity turn around? Or at least the initial stages of a recovery?

See Also:

HELOC Essentials

Answers to Common  HELOC Questions

A recent report summarized on the Calculated Risk blog explains:

“Going forward, the largest increases in the share of negative equity will most likely occur in states that have not yet experienced deep declines. The reason: the boom/bust states already have very high negative equity shares and incremental declines in home prices will result in smaller negative equity share increases relative to other states given the same decline in prices. This means that as prices continue to decline in 2009, the rise in the negative equity share of states outside the boom/bust regions will begin to accelerate more quickly relative to the boom/bust states.”

What does this mean for potential HELCO borrowers? If you’re considering taking out a home equity line of credit, you may want to do so before your area faces an increase of negative equity. You may also want to consider other options, such as traditional home equity installment loans, to avoid the possibility of HELOC line freezes.

See Also:

Is a HELOC Right for You?

HELOC Freeze Help

Many HELOC holders are now interested in receiving relief from their second mortgages. However, the federal program does not modify the loans for any second liens.

Materials provided by the government’s site FinancialStability.org, explain it succinctly:

Q: I have two mortgages. Will a Making Home Affordable Modification reduce the payments on both?

A: Only the first mortgage is eligible for a modification.

Although the second mortgage won’t be modified, it won’t prohibit homeowners from receiving help with their their original loans:

Q: I have a second mortgage. Am I still eligible?

A: Yes, but only the first mortgage is eligible for a modification.

So, in a nutshell: The government won’t modify a HELOC, but having a HELOC won’t hurt your chances of a first mortgage modification.

See Also:

Un-Freezing a HELOC

Answers to Common HELOC Questions

NY Daily News reports:

“Looking to get a loan for school? A car? A house? Fat chance.

Billions of dollars have flowed into bank vaults, but billions of dollars are not flowing out, at least not to borrowers — at least not yet.

Most banks are making fewer loans and employing stricter standards on borrowers than they did a year ago, despite the multi-billion dollar bailout of the financial industry.”

On the positive side, many major lenders such as Countrywide are continuing to advertise for new HELOC customers. Most lenders only want the best-of-the-best, but they’re willing to put some money in to find these credit worthy clients.

photo credit: TheTruthAbout…

See Also:

Home Sales Increase. Good News for Your Equity?

Will Federal Rate Cuts Affect Your HELOC APR?